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July 10, 2017

Geopolitics of liner mergers

What is the future of container shipping? Will industry consolidation continue and, if so, who will still exist in 2020? All highly relevant questions constituting a fairly amusing – yet nerdy – game at supply chain conferences. This often comes with the predictable disclaimer: nobody really knows. However, there are three “facts” that make predicting the future of the container shipping industry relatively easy. One wild card remains.

1. More consolidation is “needed”Almost all businesses in the logistics chain are currently suffering from the effects of consolidation in container shipping: shippers deplore the decline of service frequency, ports the loss of calls and terminals the stress of larger peaks. Yet, within the current business model, consolidation might be needed for the container shipping industry to be profitable: they need size to finance and fill bigger ships. In the coming years an impressive amount of new mega-ships will come into operation. Along with the predictable awe, this will bring even more overcapacity to a sector that has so far only been able to survive this by laying up vessels and scrapping ships that would normally be considering too young to demolish. So predicting more mergers is a pretty safe bet. Since 2014 we have witnessed frantic merger activity resulting in rapid disappearance of smaller carriers. There are still a few left that look vulnerable and might have only one choice: be eaten or to continue as regional niche player. By 2020 there will be no more than six global carriers with comprehensive networks.

2. COSCO will not stop until it is the biggestIt has been a spectacular runner-up: ranked sixth largest just two years ago, it is now the fourth largest global container carrier – and would enter the top 3 if the merger with OOCL goes ahead. Its ascendance will likely not stop there. As a state-owned company, COSCO has a logic that is not only commercial, but also geopolitical, maybe even predominantly so. China wants to secure its supply chains and strengthen its naval presence: dominating in container shipping can help achieve this. This has underpinned the merger of COSCO and China Shipping, their recent attempts to acquire other medium-sized carriers and the Chinese terminal shopping spree all over the world.

3. For the EU, “champions” trump competitionWhich means: consolidation is fine especially as it has benefited European carriers. This has not been admitted as such, but can be deducted from its behaviour with respect to the proposed P3-alliance and the recent merger of Maersk and Hamburg Sud. P3 would have forged an alliance of the three largest global container carriers: Maersk, MSC and CMA CGM- all European – in a way that would have transformed the classical vessel sharing agreement into a more strategic form of cooperation. The European Commission signalled it would accept this, but the Chinese authorities did not give regulatory approval, officially because it would distort competition and quite likely also for geopolitical reasons: namely to avoid the emergence of a European champion. More recently, the European Commission also accepted the merger of market leader Maersk and Hamburg Sud, under certain conditions. These precedents will limit the possibilities of the Commission to stop mergers that it likes much less, e.g. COSCO taking over a European carrier. This means – paradoxically – that the EU will have difficulties to effectively play the card of competition policy against China: it will have to allow the same degree of concentration for Chinese carriers that it apparently finds reasonable for European carriers.

How will the game unfold?The few smaller global carriers that remain are from Hong Kong (OOCL) and Taiwan (Evergreen and Yang Ming). COSCO has the best cards to buy all three. Maybe the most important reason is geopolitical. The Chinese will simply not accept that a European competitor would dare to buy up a shipping firm from their “backyard”. So this is very unlikely to happen. Moreover, COSCO is already cooperating with OOCL and Evergreen in the Ocean Alliance.

The crucial question seems to me what is going to happen to CMA CGM. It entered the Ocean Alliance as the dominant player, but might become junior partner if COSCO manages to take over OOCL and Evergreen. Moreover, COSCO apparently has shown interest in buying shares of CMA CGM. Provided that the acquisitions of OOCL and Evergreen work out, buying only part of CMA CGM (say 24%) would help pushing COSCO beyond the reach of Maersk and make it world’s largest carrier. Additional advantage for the Chinese state: via the minority position in CMA CGM they would acquire a de facto majority in Terminal Link, the terminal operator owned for 51% by CMA CGM and for 49% by China Merchants Holding, another Chinese state-owned company. And who can exclude the possibility that COSCO Ports and China Merchants port terminals will merge one day?

Wild cardOver the coming months the Chinese will no doubt test the resolve of the French to block sales of CMA CGM shares to China. The French state might even consider to buy shares in CMA CGM to pre-empt the Chinese from doing so, which might be a logical consequence of the French discussion this year on what constitutes a strategic merchant fleet. However, one could wonder if this is a sustainable long-term solution. Given the recent re-emergence of the French-German axis and the growing assertiveness in Europe vis-à-vis China, another solution might make political sense. A joint French-German carrier, partly state-owned, with potential network complementarities would not only be a powerful expression of that new political reality, but also suddenly become world’s largest carrier. For this to happen, the French president would – for a start – need to go to Hamburg…